Self-storage was long thought to be the ideal interim use for commercial land that was not quite ready for more intensive commercial or retail uses. The thinking was that you could throw up some cheap, metal, self-storage units on a secondary site and make good passive income until the area surrounding it had grown up enough where you could sell the property as a prime commercial site for big dollars. Instead, self-storage has now blossomed into a sought-after asset category in its own right, evidenced by the several publicly traded real estate investment trusts (REITs) that deal exclusively in self-storage properties, such as CubeSmart, Public Storage and Sovran Self Storage.
A Storage Boon on THE Local Front
Our market is currently experiencing a surge in self-storage activity.
A new storage facility by a local group is nearing completion on 221 in Forest next to the Gables apartments. The 12.7-acre, 55,000-square-foot former Lowe’s property on Timberlake Road was purchased for $2,750,000 in January of this year after being rezoned by U-Haul for use as a self-storage facility. Local developer Tony West is constructing 154 climate-controlled units on Judith Street off Memorial Avenue and also recently purchased the 56,000-square-foot old Harris Tire warehouse on Park Avenue with plans to convert to self-storage to,in part, serve the growing number of renters now residing in downtown lofts.
In addition to those properties under construction, more developers are looking to enter the market either by construction or acquisition. The 275-unit, 38,650-square-foot Bypass Mini Storage in Bedford just traded hands in March, while the 132-unit Amherst Storage Inn in the Town of Amherst sold for $850,000 in January. By my unofficial tally, existing self-storage facilities total approximately 750,000-square-feet of gross building area in the Lynchburg Metropolitan Statistical Area (MSA). The most recent census put the total population for our MSA at 252,634, which means that we have roughly three square feet of self-storage for every person in our area. Based on the amount of self-storage construction and activity occurring right now in our area, it appears that several local and national developers are betting on the fact that there is still room to grow in this market.
Plan for Successful Operations
The business model for self-storage is relatively simple and straightforward. People pay monthly rent for space to store their stuff. Demand for storage space is often driven by life changes (i.e. marriage, divorce, birth, death), housing changes (i.e. relocating to a new area, moving to a new apartment, buying a house, downsizing), and the fact that some of us, myself included, continue to accumulate more stuff faster than we can get rid of our old stuff. Storage units vary by size (an average unit is typically between 100 and 150 square feet) and amenities like gated access and climate-controlled environments. Some facilities will bring in additional income through the sale of moving supplies and truck rentals, but the rentable space between the four walls is their primary product. Operating costs for a self-storage facility include taxes, insurance, utilities, repairs and maintenance, advertising and management. Unlike a triple net investment or leased property, self-storage ownership requires active management of the day-to-day operation. This expense can vary widely as smaller, locally-owned properties are often unmanned and managed by the owner or an individual, while larger facilities often pay salaries to on-site staff and a fee to an off-site management group. In most cases, management is the single biggest line-item expense for any self-storage operation. Big or small, good management is critical to having a well-run and well-occupied facility.
How the Numbers Break Down
Let’s look at a hypothetical pro forma for a 250-unit, 25,000-square-foot self-storage facility with an average unit rent of $100 per month. Potential gross income would be $300,000, but their market vacancy rate is 25%, which leaves $225,000 in effective gross income. Operating expenses are estimated at $125,000 with management accounting for nearly half of that amount.
Net operating income before debt service is $100,000, or $4.00 per square foot. With capitalization rates averaging 9% to 10% for self-storage the last few years, you’d be looking at a likely market value of $900,000 to $1,000,000. While this example shows a profitable operation, self-storage facilities can and do fail when 1) markets are oversupplied, 2) assumptions about rental rates, vacancy, and expenses are misjudged, 3) a buyer overpays or overleverages the property, and (4) facilities are poorly managed.
Low Costs, High Possibilities
The barriers to entry for self-storage are comparatively low in our market.
As self-storage is an allowed use in a variety of commercial and industrial zoning districts in our area and doesn’t necessarily need to be located on a prime commercial site, suitable commercial land is readily available. Self-storage facilities have often been a great option for leftover sites that are oddly shaped, have limited frontage and visibility, or are not suited to alternative commercial development for one reason or another. Developers who choose better, more visible sites incur an increased underlying land cost. The storage units themselves, which are little more than block or a light steel frame wrapped in metal siding on a concrete slab, are inexpensive to build at a typical cost range of $20 to $45 per square foot, which is significantly below the cost of most other types of commercial construction. Because of these low barriers to entry, a developer who identifies a need can act on that belief and bring new supply to market relatively quickly. While it is unclear how much more self-storage our area can accommodate, the market should give an indication by how well it absorbs the new supply currently underway and in the pipeline.
By Billy Hansen